Many times, clients measure their success in saving money on taxes by the amount of their refund or amount owed. While it’s true that you want to avoid penalties and interest or an unexpected expense, getting a substantial refund is usually not a good thing.
What you need to keep in mind is that your refund only reflects the difference between what you paid in and your total tax. So, if your goal is paying less in taxes, then you want to minimize your total tax instead.* You can compare this number to previous years and evaluate it in terms of tax rates. Then you will know if your tax strategy was successful for the year.
The next thing to consider is that a substantial refund means that your money was tied up and unavailable to use. So, in a perfect world, you would have a zero refund and amount due. Well, we don’t live in a perfect world. Your tax professional can help you figure out suitable withholdings and estimated payments for your specific situation.
Of course, the amount of your refund or balance due is important because you need to know how much cash you will have. Hopefully, your tax return is now complete, and you know your refund or amount due. If not, we can help small business owners like you to file an extension. Don’t forget that an extension to file isn’t an extension to pay. If you owe, you need to make a payment by the usual deadline.
Topics of our future Insights:
*Why minimizing you tax liability is the wrong goal.